Saturday, August 21, 2010

Anti stimulus idiots.

An argument put about five hundred times in the last year in the Wall Street Journal (mouth piece of anti stimulus idiots) is the argument that the stimulus to date has not worked, therefor stimulus never works.

That is as daft as claiming that because pouring some water on a fire does not extinguish the fire, therefor water does not put out fires.

The flaw in both arguments is of course that in the case of fires, recessions, and a whole string of other problems, it is necessary to apply the RIGHT AMOUNT of remedy. And in many cases, this is not easy to do.

I’ll illustrate that by reference to an ultra example. The following paragraph (in red) contains only monosyllabic words, so hopefully the anti stimulus brigade will understand it.

Put too little water on a house fire, and the fire won’t go out. Put too much on, and water can do more harm than the fire.

Most mentally retarded six year olds will understand the latter point, though whether the Heritage Foundation and the Peter Peterson Foundation can understand it is moot. (The two latter are the source of many anti-stimulus articles in the WSJ).

There are a couple of other relevant points here (way beyond the comprehension of the two latter “foundations”). One is that the size of the stimulus is puny: almost irrelevant compared to the other factors making up the deficit. For some numbers, see here.

Second, in that stimulus has consisted of the creation of monetary base, this has got the above “foundations” jumping up and down with excitement about inflation. What they evidently haven’t tumbled to is that the monetary base expansion is arguably no more than the destruction of private or commercial bank created money brought about by deleveraging. See this Credit Suisse paper.

Finally, it should be mentioned that the amount of additional stimulus needed is very definitely not the same in different countries or continents. For example inflation is well under control in the U.S. but not so well under control in the U.K. (it’s around 3%). On that basis, more stimulus, relative to GDP, is permissible in the U.S. than U.K.